AGM Alts Weekly | 8.06.23
AGM Alts Weekly #13: Making private markets more public, every week.
👋 Hi, I’m Michael and welcome to my weekly newsletter, the AGM Alts Weekly. Every Sunday, I cover news, trends, and insights on the continuing evolution and innovation in private markets. I share relevant news articles, commentary, an Index of publicly traded alternative asset managers, job openings at private markets firms, and recent podcasts and thought pieces from Alt Goes Mainstream.
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Good morning from Washington, D.C., where I just came back from a midweek trip to New York.
I’ve been thinking a lot about the wealth management space and how it intersects with private markets. A key ingredient to alts going mainstream will be the wealth channel — and the growth and continued sophistication of independent wealth advisory firms and platforms have the potential to be a major driver for increased capital flowing into private markets.
The evolution of the wealth management space — and its continued consolidation with advisor M&A — itself is the first step. That alone is an interesting development in private markets as the wealth management space represents a compelling investment opportunity for private equity funds and family offices looking to take majority or minority stakes in wealth management firms. At the upper end of the market, private equity investment into wealth management firms is driving consolidation, which is creating what I’ll call “Super RIAs.” The race is on for wealth management firms to grow into $100B+ platforms.
What does this mean for alts? One of the main takeaways is that these firms will have the capabilities (if they don’t already) to have a sophisticated private markets investment strategy. Wirehouse flows into alts still represent the lion’s share of private wealth assets going into alternative investment managers, which I expect to continue. But the independent wealth channel has a chance to grow its share of allocations to private markets, particularly as the “Super RIAs” begin to have some of the breadth and depth of bank wealth management platforms (albeit with the independent, open architecture features in some respects).
This week’s newsletter features an article about Cerity (below), which at $65B and fresh capital from Genstar in 2022, is looking to expand internationally to grow its AUM. This week on AGM also features a newly released a podcast with $40B AUM Cresset’s Co-Founder & Co-Chairman Avy Stein and Director of Private Capital at Cresset Partners, Jordan Stein, where they’ve leveraged private markets investment strategies to help them become one of the fastest-growing RIAs in recent memory.
There are a number of other emerging “Super RIAs” in addition to the likes of Rockefeller, Cerity, and Cresset, who are leveraging alts to attract top advisor teams. The platforms like Focus, Hightower (listen to Hightower’s Head of Alternatives Robert Picard on AGM here), and Dynasty are also heavily invested in providing best-in-class alts capabilities for their advisors and end clients. And I’d be remiss not to include a behemoth like $500B AUA Reverence-backed Osaic (fka Advisor Group), that is more similar to the LPL IBD model, where they recently hired Dynasty Co-Founder & COO Ed Swenson to make a big push into the RIA space.
What’s the punchline? The growth of the wealth management space and private markets go hand in hand. Alternative investment funds and private markets investment platforms who figure out how to work with the “Super RIAs” will have a clear advantage in raising capital from the independent wealth channel, which will be a major driver of growth for private markets going forward.
I’ll be talking about this topic at Future Proof in Huntington Beach in September along with Apollo’s Chief Client & Product Development Officer Stephanie Drescher and Neuberger Berman Private Wealth Chief Investment Officer Shannon Saccocia, where we’ll discuss the rise of alts and how the wealth channel can play a large role in private markets going forward.
AGM has created an Index to track the leading publicly traded alternative asset managers.
Some of the industry’s largest alternative asset managers are publicly traded — and their net inflows can serve as a window into how private markets are being perceived by investors and allocators who are allocating capital into alternative investments.
AGM News of the Week
Articles we are reading
📝 Apollo chief warns private equity industry ‘in retreat’ as rates rise | Antoine Gara, Financial Times
💡 Apollo Global Management’s chief executive Marc Rowan believes that an imminent period of lower growth and higher interest rates will force private equity firms to “actually have to be very good investors.” Rowan believes that a decade of “money printing,” fiscal stimulus, and extremely low interest rates that helped private equity firms reach extraordinary profitability “is in retreat.” Other top private capital executives have echoed the same sentiment. Chip Kaye, CEO of Warburg Pincus, noted last year that the tailwind provided by a decade of geopolitical calm was reversing. Though Apollo did close its newest flagship corporate buyout fund at $20B — $4B less than its 2018 vintage — the company did beat consensus profit estimates in the second quarter. Those results were buoyed by $35B of new investor commitments as well as the impact of higher interest rates on Apollo’s $450B portfolio of debt investments. Because two-thirds of Apollo’s assets are allocated to non-buyout businesses, the firm believes they are well positioned moving forward — irrespective of whether the “golden age” of private equity is over, or not.
AGM’s 2/20: As I wrote last week, investors are getting back to fundamentals. And LPs will be more discerning about this too. A decade of low rates and high multiples buoyed the private equity (and venture) industry’s exuberance and exit outcomes, but that time period is likely over for the foreseeable future. There are still returns to be made, but it will require skill, discerning analysis, and discipline, all of which rolls up into Rowan’s comment that firms will “actually have to be very good investors.” While it makes for a more difficult environment for both funds and LPs, this is probably a net positive for the various stakeholders in private markets. Many companies will not be better off from the irrational exuberance from investors’ looser valuation standards and a growth at all costs mentality, so this “back to the future” retreat by the industry should separate the wheat from the chafe.
📝 Apollo Shapes Up as the Ultimate Nonbank | Sonali Basak, Bloomberg
💡Bloomberg’s Basak is back at it again this week on how private equity firms, particularly Apollo, are becoming the ultimate nonbanks. Fresh off the heels of pulling in a record $1B in profit this past quarter, Apollo has positioned itself well to capture the opportunities in credit. Their bets on credit and insurance have paid off well, both from the perspectives of fundraising and profits. Spread-related earnings, driven by Apollo’s Athene insurance unit, rose 76% to $799M, fueled by strong inflows and higher interest rates. Driven by the success of Athene and its credit units, Apollo’s share price has surged 35% this year, keeping pace with rivals Blackstone and Ares (which has bested both Apollo and Blackstone this year thus far with a 45% increase in their share price). One Apollo investor remarked to Basak that “Apollo is the ultimate nonbank.” In this past week’s investor call, Apollo CEO Marc Rowan provided insight on why Apollo has been so successful in recent times. And it’s largely been understanding the nuances of private credit that has driven their success. Sharing Rowan’s quote from Basak’s article in full below because it provides illuminating insight into how Apollo approaches both private credit and platform-building in private markets.
“Private credit can be investment-grade, private credit can be CCC. Barriers to entry in the private credit business are either quite low—anyone with a fund and a staff capable of evaluating investments can truly enter the private credit business—or barriers to entry can be extraordinarily high. And building a full ecosystem allows you to serve the needs of your clients in a very sophisticated way. Think of the difference between a hot dog stand and the Michelin-star restaurant: Both are in the food business, and both serve food. That is how we think about private credit and where people are positioned.
Financial markets, financial literacy around private credit has actually gotten quite sloppy. What is private credit? Well, if we start in the abstract, everything that is on a bank balance sheet is private credit. But most of the time, markets—[when] market pundits talk about private credit, they are talking about a very small sliver of a private credit universe that’s focused on levered lending. Don’t get me wrong, we like the levered lending business. Levered lending is actually a terrific business right now. It will not always be a terrific business. It is a cyclical business with low barriers to entry, but one that at the right point in time can be very lucrative. What we have tried to build is not a single fund, is not a single opportunity—we’ve tried to build an ecosystem.”
AGM’s 2/20: Apollo is proving to be a case study in building out an ecosystem of different strategies and business units in private markets. Early on in the buildout of their strategy to move into the annuities space, in part driven by their purchase of annuities provider Athene in 2021, many were skeptical that they could keep pace with the likes of their other peers. Investor focus on private credit has given Apollo wind in their sails, helping them drive a record profit this quarter. Apollo’s buildout of what Rowan calls “an ecosystem” is a great lesson for many other alternative asset managers who are looking to build out a multi-strategy platform that provides investors with an ecosystem of products and investment strategies that enable it to be a one-stop shop for LPs. It appears that the private equity space is heading in the direction of platformization, so it will not be shocking to see many others attempt to follow in Apollo’s footsteps in similar and different corners of private markets.
📝 Sizzling Cerity Partners Eyes International Markets | Charles Paikert, Family Wealth Report
💡 Cerity Partners, a private equity-backed RIA with over $65B in assets across 11,600 clients, is looking to expand internationally. Charles Paikert of Family Wealth Report covers how Kurt Miscinski, Founder and CEO of New York-based RIA Cerity Partners, is prioritizing the international expansion of the firm. Cerity’s goal has always been to become a “global professional services firm” and the 14-year old wealth manager is “actively in dialogue with various firms and parties to see if we would be a good fit,” Miscinski said. While there is “no imposed timeline” on a deal, one could happen “in the near future or year or two,” he stated. He sees a merger as feasible “in the near future or year or two.” The company specializes in providing planning, advisory, and tax services to the C-suite of large corporations. Miscinski believes there is significant opportunity as those corporations continue to expand internationally, and looks to companies including Deloitte, McKinsey & Company, and Cravath, Swaine & Moore for examples of sustained multinational success.
AGM’s 2/20: Consolidation in the wealth management space is on a continued secular trend, in part due to industry dynamics and in part due to private equity investing heavily in the wealth space. Advisors aging out and looking to retire or exit is buttressed by larger firms willing to pay attractive multiples for growth. With private equity seeing the wealth space as a highly investable opportunity due to its attractive features (sticky client base, generally low churn, steady, annuity-like revenues, and opportunity to leverage tech and inorganic growth to improve margins), the space is undergoing a lot of consolidation. We have entered the era of the “Super RIA” — the race is on for firms to achieve $100B AUM status. Rockefeller Capital Management hit the mark not too long ago, and is now pushing for $200B AUM in the next 3-5 years (Reuters) and firms like Cerity and AlTi Tiedemann Global are not far behind. The question for the likes of Cerity, in a more competitive M&A market with the likes of Cresset hiring a wealth management M&A expert and the rollup plays Focus, Hightower, and Dynasty all having M&A arms, is how much do they need to rely on international expansion to drive growth? The Investec / Rathbones merger in the UK to create a £100B firm could serve as a foreshadowing of international independent advisory firms doing the same as in the US. My view is that we’ll see the rise of the “Super RIA,” which is a net positive for private markets and fund managers looking to raise capital from the wealth channel because these big platforms have — or will build out — the capabilities of very sophisticated private markets investment practices (if they haven’t already done so) due to their size and scale. The next big question in the evolution of the wealth space going forward — will the “Super RIAs” displace the bank wealth management platforms for both the advisor who wants to go “independent” and for their clients?
📝 Nearly Three-Quarters of LPs Plan to Cut Back on VC, Survey Shows | Hannah Zhang, Institutional Investor
💡 A survey of institutional investors, 65% of whom said they would increase their allocations of buyout funds in 2024, revealed that only 13% of the same group would increase allocations to venture capital funds. 71% plan to allocate less. By comparison, only 29% of investors plan to reduce their allocations to growth equity — which was the second-highest number among the private equity categories. Venture capital fundraising has slowed significantly already this year. Only 144 VC funds closed during Q1 ‘23, compared to the quarterly average of 460 funds closed over the last five years. Though the fundraising market is becoming more top-heavy, with half of VC capital raised in the first quarter going to five funds, Eaton managing director Chris Maduri also attributes the slowdown to static valuations. “The market we’ve seen over the past couple of years has been very concerned about valuation in venture capital,” he asserted, before also noting, “You can go a year without changing the valuation of a company.”
AGM’s 2/20: It’s important to note the nuances within private markets. While continued interest in private markets and structural underallocation to private markets from the wealth channel should lead to increased overall dollars allocated to alts, different strategies within alts may have varying results. This has implications for business builders in private markets — both at alternative asset managers and at the capital raising technology platforms. For asset managers, those who are diversified with their investment strategies and products should be able to withstand lower inflows. Perhaps that’s why, as we discussed last week, asset managers are looking to acquire other firms with differentiated strategies or LP bases (particularly in private credit) to diversify their fee-related income, often increasing their valuation in the process. For capital raising technology platforms, those that are diversified across asset classes should be able to withstand the current challenges with fundraising for many funds.
📝 Family Offices Are Patiently Watching These Asset Classes for Opportunities | Alicia McElhaney, Institutional Investor
💡 Though family offices have been avoiding making major investment decisions due to the Fed rate hikes that began in March 2022, they have continued to analyze potential investment opportunities as the market approaches a different environment than has been present for nearly the last decade. Experts say private debt and real estate are areas of interest, with a focus on larger funds and platforms. Family offices are also looking to take their new allocations global. Casey Whalen, Chief Investment Officer and Head of Lazard Family Office Partners, said that her team is focused on heavily collateralized senior secured private debt for her clients. The strategy is becoming more interesting given the current interest rate environment. She also noted that they are “really focused on Asia and, in particular, Japan,” because “the [Covid] recovery is there and they’re almost moving into growth mode.” Though Japan has suffered in recent years by both an aging population and low share prices, policy shifts as well as improving valuations are leading to renewed investor attention. Managing Director at Apex Invest, Lana Callahan, notes that China, on the other hand, is frequently talked about but still lacks widespread investor confidence.
AGM’s 2/20: What interests family offices is of particular interest to many funds as the wealth channel becomes a key focus area for their capital raising efforts. Family offices can serve as a good barometer for GPs to understand what piques the interests of the wealth channel as family offices can be more nimble and have different levels of risk tolerance at times relative to their institutional counterparts. Unsurprisingly, private credit and real estate are major areas of focus for family offices. The larger alternative investment managers stand to benefit — in private credit and real estate, it appears that investors believe size matters both because in these strategies size can benefit manager performance and because LPs are looking for familiar, established managers with track records. Family offices are also the allocators who generally take risks on emerging managers, so hopefully there will be continued interest in allocating to emerging managers, particularly in venture and lower middle market private equity, where family offices are often the ones who catalyze fundraises for 1st and 2nd time funds and are the core of their capital base.
Who is hiring?
In order for alts to continue to go mainstream, we need the best talent to go into the space. Here are some openings at private markets firms. If you’d like to connect with any of these teams, let me know and I’m happy to facilitate an introduction if appropriate. If you’re a company or fund in private markets, feel free to reach out to share a job description you’d like to be listed here to highlight for the Alt Goes Mainstream community.
The latest on Alt Goes Mainstream
Recent episodes and blog posts on Alt Goes Mainstream:
🎙 Hear $40B AUM Cresset Co-Founder & Co-Chairman Avy Stein and Director of Private Capital Jordan Stein live from the Allocate Beyond Summit discuss how private markets are changing wealth management. Listen here.
🎙 Hear Alto CEO Eric Satz discuss how anyone can invest in alternatives through their IRA. Listen here.
📝 Read how 73 Strings CEO & Co-Founder Yann Magnan and team are leveraging AI to build a modern and holistic monitoring and valuation platform for private markets in The AGM Q&A. Read here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the second episode of our monthly show, the Monthly Alts Pulse. Watch here.
🎙 Hear $18B AUM Savant Wealth’s award-winning CIO Phil Huber talk about how LPs can build a strategy for investing in private markets. Listen here.
🎙 Hear Avlok Kohli, AngelList’s CEO, talk about how they are building the company of companies that is powering private markets. Listen here.
🎙 Hear Seyonne Kang, Partner and member of the private equity team at $134B AUM StepStone, discuss how the VC industry is dealing with today’s venture market. Listen here.
🎙 Hear Chris Ailman, the CIO of $307B CalSTRS, discuss how he manages a portfolio with ~40% exposure to private markets. Listen here.
🎙 Hear Robert Picard, Head of Alternatives at $117B AUM Hightower, approaches alternative investments. Listen here.
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If you have any suggestions, would like me to feature an article, research, or would like to recommend a guest or topic for the Alt Goes Mainstream podcast, reach out! I’d love to include it in my next post or on a future podcast.
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